It is a big decision to take out a loan. Be it for an emergency, education, home improvement, or debt consolidation, the amount of loan one should take is very crucial to avoid over-borrowing or under-borrowing. A 2023 report by the Reserve Bank of India states that nearly 45% of borrowers end up taking out more than they actually need, resulting in unnecessary debt. Find out how to determine the right business loan in Delhi, NCR, and the loan amount you might need and borrow wisely with the help of this article.
When considering a loan for home improvements, it’s crucial to assess the scope of your project and the associated costs. For instance, if you’re planning to upgrade your roofing, you might want to explore options like Erie Home Tallahassee, which offers a range of roofing solutions tailored to your needs. By understanding the specific requirements and potential expenses, you can determine a more accurate loan amount that aligns with your financial situation. This approach not only ensures that you have sufficient funds to complete your project but also helps in managing your budget effectively, avoiding unnecessary financial strain.
Determine Your Real Financial Needs
Before applying for a loan, list out the exact purpose of borrowing. Are you looking to cover medical bills, pay for a wedding, or consolidate debt? Knowing the specific amount you need will help you avoid borrowing excess money that might lead to higher interest costs.
Example: Home Renovation
Assume that you need cash for some home renovations. You plan to renovate your kitchen, living room, and bathroom. Costs to be split as follows:
| Item | Estimated Cost (₹) |
| Kitchen Renovation | 1,50,000 |
| Living Room Makeover | 1,00,000 |
| Bathroom Overhaul | 50,000 |
| Total | 3,00,000 |
In this case, you would borrow ₹3,00,000 for the project, based on your actual needs.
Evaluate Your Repayment Capacity
It’s essential to borrow an amount that you can easily repay. Lenders assess your repayment ability based on your monthly income and current financial obligations. Generally, they ensure that your monthly EMI does not exceed 40-50% of your monthly income.
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Practical Tip:
You can make an approximation of your monthly payments through the EMI calculator, which most lenders offer on their websites. Below are examples of two different loan amounts with a 3-year tenure at a 12% interest rate:
| Loan Amount (₹) | EMI (₹) | Total Repayment (₹) |
| 2,00,000 | 7,200 | 2,59,200 |
| 3,00,000 | 10,800 | 3,89,600 |
If your monthly income is ₹50,000, a ₹7,200 EMI for a ₹2,00,000 loan will be easier to manage than the ₹10,800 EMI for a ₹3,00,000 loan.
Factor in the Loan Tenure
Longer tenures reduce the EMI per month, but this will increase the interest paid over the total loan duration. Conversely, shorter tenure would increase EMIs but lower overall interest pay.
Example of Loan Term Impact:
| Loan Amount (₹) | Interest Rate (%) | Loan Term (Years) | EMI (₹) | Total Interest Paid (₹) |
| 3,00,000 | 12% | 3 | 10,400 | 74,400 |
| 3,00,000 | 12% | 5 | 6,700 | 1,02,000 |
Choosing a 3-year tenure results in paying ₹74,400 interest, while a 5-year tenure leads to ₹1,02,000 interest. Always aim for a balance between affordability and total cost.
Account for Additional Costs
When deciding how much to borrow, do not forget the extra costs that are sometimes added to the loan. Such may include processing fees, insurance, and any other fees that the lender may charge. For instance:
| Expense Type | Cost (₹) |
| Processing Fee (2%) | 6,000 |
| Insurance Fee | 3,000 |
| Total Extra Fees | 9,000 |
In this case, if you borrow ₹3,00,000, you’ll end up paying an additional ₹9,000 in fees.
Avoid Over-Borrowing
Probably the most common error that most borrowers commit is taking more than they really need just because they qualify for it. That means one pays more interest than one should.
Example of Over-Borrowing:
If you need only ₹2,00,000 but borrow ₹3,00,000, here is the difference in total repayment:
| Loan Amount (₹) | EMI (₹) | Total Repayment (₹) |
| 2,00,000 | 7,200 | 2,59,200 |
| 3,00,000 | 10,800 | 3,89,600 |
By borrowing ₹1,00,000 more than necessary, you pay ₹1,30,400 more over the loan term.
Consider your Future Income and Expenses.
Before finalising the loan amount, think about your future financial situation. Are there any changes in income, like a promotion or a new job? Are there some big expenses coming up, such as children’s education or a car? Adjust the loan amount based on the expected future income and expenses.
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Choose the Best Loan Terms
When comparing loan offers, look at the interest rate, processing fees, the term of the loan, and prepayment options. Such a loan will save you more money in the long run if it has a low interest rate and lesser processing fees. You may even negotiate with the lender for lower processing fees or even better terms.
Conclusion
Determining the right loan amount means assessing one’s needs, understanding their repayment capacity, and additional costs and plans. It is always important to borrow an amount that can be repaid comfortably without overburdening yourself financially. Therefore, a careful assessment of all the aspects of the loan makes it possible for you to make a decision that will save you money in the long run.
Therefore, before applying for a loan, whether for education, home renovation, or personal emergency, you should borrow only what you need.
Frequently Asked Questions
Q. Can I borrow more than I need for a personal loan?
Yes. But this will lead to increased interest costs.
Q. How do I calculate the right loan amount?
Assess your actual requirement and repayment capacity.
Q. What happens if I borrow too little?
You might find that you don’t have enough money to spend at all and have to borrow again.